529 Plans Provide a Variety of Options For College Planning

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For the latest information on 529 plans, reflecting the Bush tax law changes, check out our presentations put together in association with the three 529 plan managers.

We work with many 529 plans and can recommend a plan for your specific needs. A small sampling of a few of our favorites are here:

  • College America 529
  • Education Planning & EDPLAN 529
  • The College Bound Fund 529
  • The GIFT 529

Families looking to put a child through college can face a dilemma when investing for future higher education expenses. Traditional college planning options offer tax-advantaged investing, but allow the child to legally access the funds at age 18 or 21. Parents or grandparents who choose to retain control of their college funds generally give up tax advantages in doing so.

This often difficult choice stems from the fact that most families' goal is to provide children with access to a quality education, not a no-strings-attached cash windfall upon reaching the age of majority. Fortunately, the Qualified State Tuition Program, or 529 plan, allows not only tax-deferred growth for college investing, but offers control over assets and flexibility with how the funds are used and by whom.

The 529 plan, named for the section of the 1996 Internal Revenue Code that created it, is a state-sponsored investment vehicle. Most states feature some variation of the 529, and not all states require residency to invest in that state's plan. This allows the potential to shop around for the best plan.

The state plans come in two basic versions, of which states may offer one or both. The first and more conservative option is a pre-paid tuition plan, which offers a fixed return on the money saved in the plan based on the level of inflation for in-state college expenses. The money can be also used for out-of-state schools.

The other option is a college savings plan, in which the fund's performance is based on that of its underlying investments. Depending on the state's plan, investment options such as equities and fixed income are available, providing the opportunity to outperform the inflation of college costs.

One of the many significant benefits of the 529 plan is control. Owners of a 529 can name a beneficiary of the account, yet retain control of the assets until death. They can also control the distribution of qualified withdrawals to the plan's beneficiary, which may be used for college at any time. Funds are taxed at the beneficiary's marginal income tax rate, which as a full-time student usually falls within a lower tax bracket than the owner's. Owners can also designate a new beneficiary, so long as that person is within the immediate family of the original beneficiary. In other words, a sibling of the original beneficiary would be eligible to receive transferred funds; a cousin would not.

There are many other significant benefits of a 529 plan. These are just a few that may appeal to college savers:

  • Earnings may grow tax-deferred until used for qualifying higher education expenses. These expenses include tuition, fees, books, equipment and supplies. Room and board expenses may also qualify if the student meets certain criteria.

  • If the beneficiary receives a scholarship, funds in the plan can be withdrawn without penalty, passed on to a beneficiary's immediate family member or left alone for graduate school. Should the beneficiary pass away or become disabled, withdrawn funds are not penalized but are taxed to the owner.

  • Owners of 529 plans may withdraw assets for their own personal use. However, non-qualified withdrawals are subject to income tax, and gains in the fund are subject to a minimum 10 percent penalty. So in other words, even if funds are withdrawn for non-educational purposes, the original contribution to the plan plus 90 percent of the gains is available to the owner on a tax-deferred basis.

As with any financial plan, the 529 plan may not be right for everyone. But as a flexible, tax-deferred college planning tool, this plan is definitely worth a look. We can help you decide if this plan works in your situation.

What we do for our clients:

  • Determine your need for college funding. We will analyze your current savings and expected future contributions and compare that to our expectations for future college inflation for the colleges of your choice. Our database of colleges includes all American colleges and universities and incorporates all expenses, room, board, books and tuition. We will make realistic assumptions regarding your after tax investment returns as well.  

  • We will recommend the type of college funding vehicle we believe is best for you and your child given your contribution expectations, likelihood of scholarship, your tax bracket, the age of your child, and the school choice. It is possible that we will recommend different funding vehicles for different children in the same household.

  • Finally, for those who desire help in implementing our recommendations, we can open and direct your investments in 529 plans, Education IRAs, Roth IRAs, UGMA or UTMA accounts. As independent advisors, we have access to virtually all of the best investment managers available.

Should you wish to schedule a free introductory appointment or receive more information click here .

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